Toronto-Dominion Bank

Toronto-Dominion Bank (TSX: TD) is one of the largest banks in North America and operates through three segments: Canadian retail banking, U.S. retail banking, and wholesale banking. The bank's U.S. operations span from Maine to Florida, with a strong presence in the Northeast.

Key Highlights:

• Stable Dividend distribution: Despite the ongoing economic jolt, the group has distributed a total dividend of CAD 2,785 million in 6MFY21, slightly higher than CAD 2,752 million in 6MFY20. The group has a prover track record of dividend distribution over a period of time. Notably, the stock carries a dividend yield of ~3.6%, which is decent considering the current interests rate environment.

• Higher digital adoption driving the growth: In the recent past, the group has reported strong growth in digital adoption. Now, customers can independently execute their own transactions, which provides ample cross-selling opportunities. Digital adaptation has grown by 270 bps on y-o-y basis in Q2FY21, across both the Canadian and US retail to 62.1% and 50%, respectively. Moreover, active mobile users were up by 8.9% and 4%, respectively, in Q2FY21 to 6.2 million and 4 million users, respectively.                  

Source: Company Presentation

• Strong Balance Sheet: The group’s balance sheet remained strong at the end of Q2FY21, with Common Equity Tier 1 Capital ratio stood at 14.2%. The CET 1 ratio improved 63bps from the previous quarter.

Q2FY21 Financial Highlights:

• TD declared its quarterly result, wherein total revenue stood at CAD 10,228 million, as compared to CAD 10,528 million in the previous corresponding period (pcp). The decline was primarily due to a lower Net interest income (CAD 5,835 million v/s CAD 6,200 million in pcp) on account of lower margins in the Canadian and U.S. Retail segments.
• The group reported recovery from credit losses amounting to CAD 0.377 million, as compared to a provision for credit losses of CAD 3,218 million in Q2FY20, while higher non-interest expense (CAD 5,691 million v/s CAD 5,051 million in pcp).
• The company reported net income, on an adjusted basis of CAD 3,710 million compared to CAD 1,531 million in pcp. The growth was supported by a recovery of credit losses in the current quarter, as mentioned above.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks:  Continuation of lower interest would pressurize the bank’s margin. If the pace of recovery deteriorates, the bank might witness a rise in provisioning charges.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

The group is a leading bank in North America and derives its majority income from Canada, wherein the group witnessed an increase in the fee-based income primarily from the wealth and banking businesses coupled with an increase in insurance volumes in the recent quarter, while the above is expected to sustain supported by the gradual recovery of the economy. We have valued the stock using the Price to Book based relative valuation method and have arrived at a target upside of single digit (in percentage terms). For the said purposes, we have considered peers like National Bank of Canada, National Bank of Canada etc. Hence, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 87.09 on June 18, 2021.

One-Year Technical Price Chart (as on June 18, 2021). Analysis by Kalkine Group

Magna International Inc.

Magna International Inc. (TSX: MG) is a mobility technology company and has 342 manufacturing operations and 91 product development, engineering and sales centres and has operations across more than 27 countries.

Key Highlights:

• Introduction of new technology: The company recently launched its innovative Surface Element Lighting technology, which offers a wide range of options for automotive designers. As notified, the above technology would be used for the all-new 2021 Volkswagen ID.4. The technology also offers the choice of different pre-programmed lighting animations and other personalization.
  

• Stable Cash Flow generation: Despite the current economic slowdown, the company reported a higher cash from operations of USD 661 million in Q1FY21, improved from USD 639 million in Q1FY20. The increase was supported by higher net profit.

• Transition to Electric Vehicles: The company’s operation offers technology services to Electric Vehicles, and a gradual shift towards EV vehicles by most of the nations would lead to higher business prospects for the company due to higher orders from the EV clients. Notable, the group expects an elevated managed sales with more than 50% sales CAGR over the next few years from its LG Joint Venture, which is a key positive.

Q1FY21 Financial Highlights:

• MG declared its quarterly results, wherein the company posted sales of USD 10,179 million, stood higher compared to USD 8,657 million in the previous corresponding period (pcp). The increase was driven by solid growth from China (USD 6,027 million v/s USD 3,227 million in pcp).
• The quarter witnessed an increment in cost of goods sold (USD 8,662 million v/s USD 7,567 million in pcp), coupled with an increase in Selling, general and administrative costs (USD 430 million v/s USD 381 million in pcp). Income from operations before income taxes stood higher at USD 805 million v/s USD 386 million in pcp.
• Net income climbed to USD 622 million, from USD 252 million in Q1FY20. The increase was driven by the above factors, partially offset by higher income tax (USD 183 million v/s USD 134 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  A slowdown in auto sector would affect the demand of the company’s offerings. The product of the company requires constant innovations and upgradations, in order to remain retain competitive. Hence, the company might witness higher research and development cost, which might take a toll on the margin and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company commands a higher margin than the industry median, which is a key positive. Notably, operating margin and net margin stood at 7.9% and 6.1% in Q1FY21, respectively higher than 7.6% and 4.7% of the industry median. Notably, the group also distributed a higher dividend of USD 130 million in Q1FY21, as compared to USD 121 million in pcp. The above indicates strong liquidity levels and stable cashflow generation. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Borgwarner Inc, Autoliv Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 110.10 on June 18, 2021.

One-Year Technical Price Chart (as on June 18, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.